We estimate a model of individual long-run inflation expectations when inflation follows a trend-cycle time series process with panel data from the U.S. Survey of Professional Forecasters. We use our model to study average long-run expectations when individual forecasters know the inflation process, observe inflation and receive common and idiosyncratic signals about long-run inflation. We find coordination of sentiments around the inflation target prevented expectations from becoming unanchored in the face of inflation running persistently below target in the 2010s. We apply our model to study the case of a U.S. central banker setting policy in December 2015 when inflation had been running below target for many years, and in December 2022 when it had been running very hot for a year and a half. We find that if the projections from the Fed’ December Summary of Economic Projections were realized they would be inconsistent with preventing long-run inflation expectations from become unanchored. This is so even with sentiments coordinated in a manner consistent with their historical behavior. In the most recent episode we find that the common signal is relatively imprecise and so it is even harder for sentiments about long-run inflation to be coordinated.
We provide evidence on how banks and non-bank financial intermediaries differ in their response to monetary policy. Our findings are based on a standard empirical macro model for the euro area, augmented with balance sheet data for banks and investment funds. The model is estimated via local projections, using high-frequency methods to identify different types of monetary policy shocks. Short-rate shocks lead to a significant balance sheet response of banks and investment funds, with a slightly swifter and more persistent reaction of banks. Long-rate shocks instead exert only short-lived effects on bank balance sheets, whereas investment fund balance sheets exhibit a stronger and more persistent response. The relative role of different types of financial intermediaries hence emerges as a relevant factor in shaping the transmission process for conventional and non-standard monetary policy measures.
This paper studies the effect of different types of monetary policy announcements on household inflation expectations based on micro data from a survey of German households. As unique feature, interviews of the survey were conducted both shortly before and after monetary policy events. This timing provides a natural experiment to identify the immediate effects of policy announcements on household inflation expectations. In contrast to most existing studies, the availability of the survey over a period of 15 years also allows me to exploit the time-series dimension to estimate how policy announcements affect household inflation expectations over the medium-term. I find that policy rate announcements lead to quick and significant adjustments in household inflation expectations with the effect peaking after half a year. Announcements about forward guidance and quantitative easing, on the other hand, have only small and delayed effects. My results suggest that monetary policy announcements can influence household expectations but further improvements in communication seem to be necessary to reach the general public more effectively. In particular, in an environment where policy rates are constrained by the effective lower bound, it may be very hard for central banks to influence household expectations.
We identify in a SVAR shocks that best explain future movements in different measures of underlying inflation over a five-year horizon and label them as news augmented shocks to underlying inflation. Independently of the measure used, such shocks raise the nominal rate and inflation persistently, while they induce mild and short-lived increases in economic activity. The extracted inflation shocks have differential distributional effects. They increase significantly and persistently the consumption of mortgagors and home owners. Differently from the traditional monetary policy disturbances, news augmented shocks to underlying inflation induce a positive wealth effect for mortgagors and home owners, driven by a reduction in the real mortgage payments and a persistent increase in real house prices that they induce.